Agency Law

An understanding of the law of agency is important because an insurance
company, like other companies, must act through agents.

Agency Law Principles

Agency is a relationship in which one person is authorized to represent and
act for another person or for a corporation. Although a corporation is a legal
"person," it cannot act for itself, so it must act through agents. An
agent is a person authorized to act on behalf of another person, who is called
the principal.

In the field of insurance, the principal is the insurance company and the
sales representative or producer is the agent. When one is empowered to act as
an agent for a principal, he or she is legally assumed to be the principal in
matters covered by the grant of agency. Contracts made by the agent are the
contracts of the principal. Payment to the agent, within the scope of his or her
authority, is payment to the principal. The knowledge of the agent is assumed to
be the knowledge of the principal.

Presumption of Agency

If a company supplies an individual with forms and other materials (signs and
evidences of authority) that make it appear that he or she is an agent of the
company, a court will likely hold that a presumption of agency exists. The
company is then bound by the acts of this individual regardless of whether he or
she has been given this authority.

Authority

An agent has one of three types of authority:

Expressauthorityis an explicit, definite
agreement. It is the authority the principal gives the agent as set forth in his
or her contract.

Impliedauthorityis
not expressly granted under an agency contract, but it is actual authority
that the agent has to transact the principal's business in accordance with general business
practices. For example, if an agent's contract does not give him or her
the express authority of collecting and submitting the premium, but the agent
does so on a regular basis, and the company accepts the premium, the agent is
said to have implied authority.

Lingering implied authority means that the agent carries "signs or evidences of authority." By having these evidences of
authority, an agent who is no longer under contract to an insurer could mislead
applicants or insureds. When the agency relationship between agent and company
has been terminated, the company will try, or should try, to get back all the
materials it supplied to the former agent, including sales materials. On the other hand, the public cannot assume that an individual is an
agent merely because he or she says so. The agent must carry the
credentials (for example, the agent's license and appointment) and company
documents (such as applications and rate books) that represent him or her as
being an agent for an insurance company.

Apparentauthorityis
the authority the agent seems to have because of certain actions undertaken
on his or her part. This action may mislead applicants or insureds, causing
them to believe the agent has authority that he or she does not, in fact,
have. The principal adds to this impression by acting in a manner that reinforces
the impression of authority. For instance, an agent's contract usually does not grant him the authority
to reinstate a lapsed policy by accepting past due premiums. If, in the past,
the company has allowed the agent to accept late premiums for that purpose, a
court would probably hold that the policyowner had the right to assume that the
agent's acceptance of premiums was within the scope of his or her
authority.

Collection of Premium

All premiums received by an agent are funds received and held in trust. The
agent must account for and pay the correct amount to the insured, insurer, or
other agent entitled to the money. Any agent who takes funds held in trust for
his or her own use is guilty of theft and will be punished as provided by
law.

Agent's Responsibility to Insured/Applicant

An agent has a fiduciary responsibility to the insured, the insurer, the
applicant for insurance, current clients, and so forth. The agent has a
fiduciary duty to just about any person or organization that he or she comes
into contact with as part of the day-to-day business of transacting
insurance.

CAUTION

By definition, a fiduciary is a person in a position of financial
trust. Thus, attorneys, accountants, trust officers, and insurance agents are
all considered fiduciaries.

As a fiduciary, the agent has an obligation to act in the best interest of
the insured. The agent must be knowledgeable about the features and provisions
of various insurance policies and the use of these insurance contracts. The
agent must be able to explain the important features of these policies to the
insured. The agent must recognize the importance of dealing with the general
public's financial needs and problems and offer solutions to these problems
through the purchase of insurance products.

As a fiduciary, the agent must collect and account for any premiums collected
as part of the insurance transaction. It is the agent's duty to make
certain that these premiums are submitted to the insurer promptly. Failure to
submit premiums to the insurer, or putting these funds to one's own
personal use, is a violation of the agent's fiduciary duties and possibly
an act of embezzlement.

The insured's premiums must be kept separate from the agent's
personal funds. Failure to do this can result in comminglingmixing
personal funds with the insured or insurer's funds.

Waiver and Estoppel

The legal doctrines of waiver and estoppel are directly related to the
responsibilities of insurance agents. An insurer may, by waiver, lose the right
of making certain defenses that it might otherwise have available.

NOTE

Waiver is defined as the intentional and voluntary giving up of a
known right. An insurance company may waive its right to cancel a policy for
nonpayment by accepting late payments.

Waiver and estoppel often occur together, but they are separate and distinct
doctrines.

NOTE

Estoppel means that a party may be precluded by his or her acts of
conduct from asserting a right that would act to the detriment of the other
party, when the other party has relied upon the conduct of the first party and
has acted upon it. An insurer may waive a right, and then after the policyowner
has relied upon the waiver and acted upon it, the insurer will be estopped from
asserting the right.

The agent must be alert in his or her words, actions, and advice to avoid
mistakenly waiving the rights of the insurance company. As a representative of
the company the agent's knowledge and actions may be deemed to be knowledge
and actions of the company.

Agent's Responsibilities to Company

The agent's contract or agency agreement with the insurer will specify
the agent's duties and responsibilities to the principal. In all insurance
transactions, the agent's responsibility is to act in accordance with the
agency contract and thus for the benefit of the insurer. In accordance with the
agent's fiduciary obligation to the insurer and his or her agency
agreement, the agent has a responsibility of accounting for all property,
including money that comes into his or her possession. As part of the
agent's working relationship with the insurer, it is important that
pertinent information be disclosed to the insurer, particularly with regard to
underwriting and risk selection. If the agent knows of anything adverse
concerning the risk to be insured, it is his or her responsibility to provide
this information to the insurer. To withhold important underwriting information
could adversely affect the insurer's risk selection process. In accordance
with agency law, information given to the agent is the same as providing the
information to the insurer.

It is the agent's responsibility to obtain necessary information from
the insurance applicant and to accurately complete the application for
insurance. A signed and witnessed copy of the application becomes part of the
legal contract of insurance between the insured and the insurer.

Finally, the agent has a responsibility to deliver the insurance policy to
the insured and collect any premium that might be due at the time of
delivery.

The agent must be prepared to provide the insured with an explanation of some
of the policy's principal benefits and provisions. If the policy is issued
with any changes or amendments, the agent will also be required to explain these
changes and obtain the insured's signature acknowledging receipt of these
amendments.

Company's Responsibility to Agent

The company is required to permit the agent to act in accordance with the
terms of the agent's employment contract, and the company must recognize
all the provisions of that contract.

In addition, the company must pay the agent the compensation agreed upon in
the contract, must reimburse the agent for proper expenditures made on behalf of
the principal, and must indemnify the agent for any losses or damages suffered
without fault on the part of the agent but occurring on account of the agency
relationship.

Potential Liabilities of Agent/Errors and Omissions (E&O) Exposure

Errors and omissions (E&O) insurance is needed by professionals who give
advice to their clients. It covers negligence, error, or omission by the insurer
or producer who is the insurer's representative. E&O policies protect
producers from financial losses they may suffer if insureds sue to recover for
their financial loss due to a producer giving them incorrect advice (error) or
not informing them of an important issue (omission). Because a producer's
office is very busy, he or she must take special care to follow strict
procedures in regard to taking applications, explaining coverages, collecting
premiums, submitting changes to policies upon an insured's request, and
preparing claim forms.